An edited down version of this article was published in
Oil & Gas Journal on January 17, 1994. GB

Challenges in petroleum policy for the next President of Mexico

George Baker

Summary

The next president of Mexico, who will take office on December
1, 1994, faces the challenge of constructing a new legal, commercial and
philosophical paradigm for the oil and gas industry in Mexico. As the
present review of petroleum policies and measures of the past five years
will show, the existing paradigm has worked only imperfectly, and there
are a number of items of unfinished business that the new administration
will need to address.

Leaving aside the basic question of the policy framework for oil
production (OGJ, Mar. 1, 1993) the new paradigm must address, in
addition, six central issues: (1) the need to strengthen Pemex's image
in Mexico as an environmentally sensitive and safety-conscious
producer, refiner and distributor of petroleum products, (2) the need to
reverse the declining morale in Pemex in the mid-management as well as
blue-collar ranks, (3) the need to increase domestic supply of unleaded
gasoline and reduce the production and burning of high-sulfur fuel oil,
(4) the need to set forth a workable framework for natural gas
transmission that complements the 1992 regulations that permit private
investments in electric power generation, (5) the environmentally-driven
need to increase the intensity of domestic natural gas production and
consumption for industry, residential and even transportation uses, (6)
the need to face up to the fact that Mexico continues to lack a regulatory
framework that is attractive to commercial lenders on a non-recourse,
project financing basis.

First, a review of recent developments and trends.

Upstream

Pemex's production program for 1993 remained much as it was
in 1992, with the bulk of oil production falling to the offshore fields in
Campeche SoundPPmostly from the CantarellfieldPPand the bulk of gas
production corresponding to the onshore Reforma fields (Table 1). Of
the oil produced, about 52% was light oil of the Isthmus and Olmeca
blends (32o API or above) and the remainder of the heavy Maya grade
(in the area of 22o API ).

Within Mexico, Pemex continues to be concerned about
domestic natural gas supply. The thesis advanced by the Canadian
government in October 1991 that Mexico in the coming ten years or so
could become a major gas exporter to the United States seems all but
forgotten. On the contrary, Pemex is taking a new look at its gas
reserves from the standpoint of merely maintaining production in the
area of 3.5 bcfd. Pemex is aware that, with the passage of NAFTA, it
will be required to give more attention to providing natural gas service to
the U.S.-border region, for reasons of both environmental and industrial
policy. Meanwhile, in early 1993 the Canadian Energy Research
Institute (CERI) of Calgary began an interdisciplinary study of the North
American continental gas market in the dimensions of both supply and
demand; the project is funded by about thirty U.S. and Canadian
companies and has received support from Mexican organizations.
Another, more limited study by the Border Research Institute at Las
Cruces concerns natural gas supply as a factor affecting economic
development along the New Mexico-Chihuahua border.
Pemex, through its subsidiary, Mexpetrol, is planning to
participate with a little-known firm, Underwater Investments, founded
by former Getty explorationists, in the development of a number of oil
fields in Guatemala. (In September rumors were circulating in Mexico
that Mexpetrol was in discussion with Texaco about a joint Guatemalan
project.) According to a Pemex press release of November 29, 1993,
the size of the project is estimated at $30 million; the investment share
of Pemex (in association with a Mexican export bank, Bancomext) is
$10 million. Under Investments invited Pemex's collaboration after
having obtained oil concessions from another U.S. company. The joint-
venture capitalizes on Pemex's access to low-cost capital and interest in
extending its knowledge of the petroleum geology of the Mexico-
Guatemalan border region, where, in 1991, the discovery of the
Ocosingo field was announced. (Mexpetrol is also considering
investment projects as diverse as the construction of a gas pipeline from
Bolivia to Brazil and the retrofitting of a refinery in Yaroslav, Russia.)
Within Mexico, Pemex continues to be concerned about
domestic natural gas supply. The thesis advanced by the Canadian
government in October 1991, that Mexico in the coming ten years or so
could become a major gas exporter to the United States, seems all but
forgotten. On the contrary, Pemex is taking a new look at its gas
reserves from the standpoint of merely maintaining production in the
area of 3.5 bcfd. Pemex is aware that, with the passage of NAFTA, it
will be required to give more attention to providing natural gas service to
the U.S.-border region, for reasons of both environmental and industrial
policy. Meanwhile, in early 1993, the Canadian Energy Research
Institute (CERI) of Calgary began an interdisciplinary study of the North
American continental gas market in the dimensions of both supply and
demand; the project is funded by about thirty Canadian and U.S.
companies, with support from Mexican organizations. Another, more
limited study by the Border Research Institute in Las Cruces concerns
natural gas supply as a factor affecting economic development along the
New Mexico-Chihuahua.
As one unexpected outcome of this renewed interest in Mexican
natural gas, in mid-January 1994 a conference jointly sponsored by the
American Gas Association, the Canadian Gas Association and the
Mexican Gas Association is being held in Mexico City. One of the
items on the agenda is the outlook for natural gas vehicles in Mexico
City and Monterrey. In August 1993 the Commerce Ministry
announced that the consumer price of compressed natural gas could be
set by the venderPPan unprecedented instance in which market forces are
allowed to determined the final price of an energy product.

Downstream

Trade

During the first seven months of 1993 Pemex exported 1.334
million b/d of crude oil, approximately 64% to the United States, 15.3%
to Spain, 4.9% to the Far East and 15.8% to other markets. The fall of
oil prices in November and December pushed the spot price of Maya oil
below $9/bbl, and the overall revenue picture for Pemex in 1994 is not
as bright as the country needs it to be.